Gabriel L. I. Bevilacqua, Chancellor
Philadelphia Bar Association
City Council Tax Hearings May 10, 2004
Council President Verna and members of City Council, on behalf of the 13,000 members of the Philadelphia Bar Association I offer my thanks and appreciation for this opportunity to once again testify on tax reform.
I have with me today my colleagues Bar Association Chancellor-Elect Andrew Chirls and Vice Chancellor Alan Feldman. Andy will be Chancellor in 2005 and Alan will lead our Association in 2006.
They have joined me so that we may demonstrate the sustained commitment of our Association and its members to tax reform. Indeed, several Chancellors of the Bar Association have appeared before you in the past few years to speak on this topic. Our concern is real and it is ongoing.
We understand that tax reform is a huge issue for this Council and this city government to confront. And, indeed, that is reflected by the fact that there are 13 pieces of legislation that you are considering.
But I want to call your attention today to one particular inequity which we believe can and should be promptly addressed especially if we are really serious about tax fairness and a pro-growth, pro-jobs economic policy in our city.
Specifically, we urge the city to address the inequality that is inherent in the interaction of the Net Profits Tax and Business Privilege Tax and thereby correct the over-taxation of professional firms that are organized as partnerships.
Right now, the City effectively taxes partner income at a combined rate of at least 6.7% but taxes compensation paid to employee owners of businesses operated as corporations or sole proprietorships at rates ranging from 3.9127% for nonresidents to 4.5% for residents.
As you may know, the Philadelphia Business Privilege Tax (or BPT) applies to businesses conducted within the City, regardless of form of organization (for example, corporation, partnership, sole proprietorship, LLC). The BPT consists of two tax bases, a tax on gross receipts and a tax on net income. With regard to the tax on net income, taxpayers pay at the rate of 6.5% on income attributable to business done within the City. By regulation, the Citys Department of Revenue has directed that businesses conducted in partnership form, may not deduct payments made to partners even where partners perform a significant level of service on behalf of the partnership. Businesses formed as corporations, certain LLCs or sole proprietorships, however, may deduct payments of compensation made to employees and owners (i.e., shareholders). No apparent policy supports this treatment. For the reasons we encourage the Council to consider the inequity presented in this situation and resolve to propose to the City the allowance of a deduction by partnerships of payments made to partners who participate in the operation of their business.
I have here today the proposed legislation which would accomplish this and I am happy to present it to you and would respectfully welcome the opportunity to have it introduced by a member of Council.
We believe that the inequities which Ive just enumerated are among the major factors in the relocation of professional firms from the City into the suburbs. Thats why we care so deeply about this.
Due in large part to the Citys tax structure as it applies to partnerships, many firms have left the City, either entirely or in part.
Many professional services firms operate in partnership form for various reasons. Significant tax and non-tax restrictions exist to limit their ability to convert to non-partnership (or corporate) form.
And in many ways, this is really a small business issue. Bear in mind that many small and mid-size firms are organized as partnerships and consequently suffer under this provision. In fact, nearly two-thirds of the membership of the Bar is composed of small and mid-sized firms.
So, this is a serious issue.
A study released in January 2003 by the Central Philadelphia Development Corporation explains that Pennsylvania suburbs have enjoyed a robust 34% rise in professional services jobs between 1990 and 2000. The study goes on to note that Philadelphia added no new commercial office buildings in the 1990s. By contrast, the Pennsylvania suburbs have added 12 million square feet of space, the equivalent of 10 Liberty Place Towers, surpassing Center City in total space in the process.
In light of such restrictions, and, faced with onerous taxation by the City, firms have (as the CPDC has recognized) explored alternatives such as relocating outside Philadelphia. The City has suffered and continues to suffer as a result.
A recent Pennsylvania Economy League study showed that a law firm is faced with an 80% greater increase in taxes if it expands in Philadelphia rather than in the suburbs.
And over the past fifteen years our surveys show that Philadelphia law firms have been opening satellite offices in surrounding counties at an accelerating rate. Yet, incredibly the areas major law firms (including many national and regional powerhouses) have continued to maintain their headquarters offices in the city. Clearly, the firms would rather not leave.
Think for a moment about where Philadelphia would be without center city law firms. If you take a virtual walk up Market Street West with me, you will find nationally known leaders in the legal services sector. Big important businesses, one after the other: Saul Ewing, Dilworth Paxson, Obermeyer, Schnader, Post & Schell, Reed Smith, White and Williams, Duane Morris, Morgan Lewis, Ballard, Stradley Ronon and Cozen OConnor. And thats just Market Street. Within a few blocks you have Dechert, Pepper Hamilton, Blank Rome, Drinker and Wolf Block.
Ladies and gentlemen, these are marquis names.
These are the names behind the Market Street West renaissance.
The jobs that these names bring to our city are good jobs.
The ancillary business that the legal services sector supports are vital to our regional economy.
The top 22 Philadelphia law firms employ about 8,500 people in Philadelphia and pay nearly $44 million annually to the city in taxes (including net profits, wage, business privilege, use and occupancy and real property taxes). These same firms pay nearly $70 million annually to lease 14% of all office space in center city. And dont forget, this is only about a third of the entire legal services sector in Philadelphia.
So, you can multiply these figures, probably several times over. In fact, if all of the citys lawyers and law firms were part of a single corporation, wed be one of the very largest corporations in the region.
Philadelphia without Philadelphia lawyers?
Its hard to imagine.
Center City as it exists today would be totally unrecognizable. Whole parts of it might well be deserted, blighted, barren.
Thats not our vision of the city.
We love Philadelphia.
We want to see our city continue to grow and prosper.
We care about the city.
And we want to work with the city government and with City Council to continue to bring good jobs and solid businesses to the city. We can start with the change that Ive recommended today.
Thank you, and I welcome your questions.